Bernstein: New Way To Play Oil In 2016

  • According to Nicholas Green of Bernstein, 2016 could be a turning point for the oil and gas sector.
  • Green noted that oil and gas is trading at the lowest price-book valuation in 30 years, but oil prices are likely to increase over the next 24 months.
  • The analyst suggested fund managers should be "looking to develop a portfolio strategy" for the sector's rebound.
  • It is difficult to find a "less loved" sector than oil, according to Nicholas Green of Bernstein.

    In a report published Monday, Green stated that oil and gas investors have faced a "tough ride," given the sector's history of "excessive" spending and cost overrun – not to mention being exposed to a commodity that has lost more than half of its value. Nevertheless, the analyst offered three reasons why now is the time for investors to look at the European oil and gas sector.

    Energy Is The ‘Least Crowded' Sector

    It stands to reason that the least crowded stocks relatively outperform, Green argued. Currently, energy is the "least crowded sector globally," and this is a "positive for downside risk mitigation."

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    Oil & Gas Is Cheap

    Secondly, Green noted that the energy sector is valued at "materially the lowest point" over the past 30 years. Even though oil and gas is cheap, the theory of mean-reversion "looks likely," although "over an admittedly indeterminate timeframe."

    Oil Prices Have To Rise

    Finally, Green acknowledged that the forward-curve is a "questionable concept" for many investors and is a "bad predictor" of oil prices. However, with oil prices below $50 a barrel, it is "difficult to find a constituent for whom these oil prices do sustainably work."

    Top Sector Picks

    Green continued that fund managers "should today be looking to develop a portfolio strategy" to gain exposure to the eventual oil and gas rebound.

    "The historical analogy from the Klondike – better to own the gold or sell the picks and shovels? – has rarely seen such relevance," Green wrote.

    Green argued that now is the time for fund managers to act and investors to follow the advice for their own personal portfolio. The analyst suggested that a basket of integrateds for safety and oil services for exposure to the rebound is the most prudent strategy.

    Within oil services, Green's top pick is Tenaris SA (ADR) TS, a seller of steel pipes to the oil and gas industry. The analyst noted investors would gain exposure to a "quality company almost at genuine trough."

    PETROFAC LTD LONDON POFCF and TECHNIP SA TNHPF are two companies with a "better outlook than many of their peers," while SBM OFFSHORE NV SBFFF is a "countercyclical that will nevertheless rise on a sector recover." Image Credit: Public Domain

    Finally, within integrated oils, the analyst's top picks are Royal Dutch Shell plc (ADR) (NYSE: RDS-A), Galp Energia SGPS SA GLPEF, Statoil ASA(ADR) STO and Eni SpA (ADR) E.

    Posted In: BernsteinNicholas GreenOil & GasOil Investmentoil pricesAnalyst ColorLong IdeasCommoditiesTop StoriesMarketsAnalyst RatingsTrading Ideas